When you go to a bank to deposit your money, you will need to open both a checking and a savings account. Although they are both types of bank accounts, there are key differences in each that affect how you should use them. In this article, we will go over the basic differences between checkings and savings accounts.

What is a checking account?

This is your everyday account. Most of your paycheck should go directly in here, and you should be paying bills and other expenses with this account. The checkings account has no limit to the amount of withdrawals you can make. According to the FDIC, the average interest rate for checkings account is 0.09% APY. This percentage is incredibly low, and is practically useless. When you use a debit card, money is withdrawn directly from your checkings account.

What is a savings account?

Contrary to popular belief, a savings account is not where all of your savings should go. A savings account should only be your emergency fund, about 3-6 months worth of your income. Money in this account should only be used in case of a dire emergency, or during a brief time of unemployment. Usually, you have to transfer the amount you want to withdraw from your savings to your checkings first. The amount of times you can do this is 6, in accordance with Regulation D, a Securities and Exchange Commission (SEC) Regulation. Interest rates for savings accounts vary wildly from bank to bank, but the rates are generally higher than that of checkings accounts, but lower than an average long-term ROI from the stock market of 8%.

What else should I use in addition to checking and savings accounts?

For the savings aside from an emergency fund, they should go into brokerage or IRA accounts to invest in the stock market. Given that the rate of interest that you earn on deposits on both checking and savings accounts is closer to 0 than 1%, the real value of your money is decreasing with inflation at 2% a year when it sits in a checking or savings account. Your average long-term ROI of 8% from the market will be considerably higher than the interest rate at any checking or savings account, so it is important that you let your excess money grow. Although 8% may not sound like a lot, it is very strong when factoring in compounded interest, which you can read more about here. It is crucial to understand what various accounts do and how you can successfully leverage them to make your money work for you.

How do I choose which bank to open my accounts at?

First off, each bank has different types of checkings and savings account, which vary by many different factors, such as a monthly service fee, minimum account balance, ATM transaction fees, and many more. It is likely that you will find a type of account that will work for you at any bank. Bank accounts have monthly service fees, but can be avoided if you have a certain amount of money in them. Accounts with higher minimum amounts may offer more features such as no ATM transaction fees, or online bill payment. Go with the account where you know you will always be above the minimum amount to avoid fees, but also the account you’ll get the most benefits.

For example, most students would prefer the Chase College Checking Account over the Chase Premier Plus Checking account. They are both Chase checkings account, but the college account has a lower minimum balance of $5000 to avoid the monthly service fee, while the Premier Plus account requires $15,000. Because students usually have less money, the Chase College Checking Account would be the way to go.

But perhaps you’re a young working professional with more money and more complex financial needs. Because you know you will always have more than $15,000 in your account, the Premier Plus account is preferable. It pays some interest(very little, but it’s better than nothing), offers 4 ATM fee exempt transactions a month, and grants access to a deposit box, among numerous other small bonuses. It costs you nothing more than the College Checking Account, so long as you stay above the minimum balance, so there would be no reason to not choose this one.

Closing Remarks

Perhaps the first of many steps in managing your finances and taking control of your future, opening a checking and savings account is an important milestone. You won’t remember every detail from this article, but do remember this: your checking account is for everyday use, and your savings account is strictly for a 3-6 month rainy day fund, and should not be withdrawn from. In addition, look carefully to find the right account for you based on the minimum account balance required to waive monthly fees!

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